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Volume IconTwin deficit problem: What does it mean and how does it affect an economy?

The finance ministry recently said that India is at low risk of stagflation. But it also cautioned about a twin deficit problem that India may face. This report tells us what it means

ImageAkash Podishetti New Delhi
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The Russian invasion of Ukraine entered its 119th day on June 22. The epicentres of the war are in tatters, and casualties are mounting. But beyond the region's borders, countries are engaged in a different kind of war—a war to save their economies.

Crude oil prices have been hovering above $100 a barrel for a while, supply chains have been disrupted, inflation in most countries is above their comfort level, and the world's largest economy, the US, is staring at recession. India, too couldn't remain untouched.

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In its recent 'Monthly Economic Review', the country's finance ministry has struck a note of caution on the twin deficit problem. 

So, what is a twin deficit problem?

The twin deficit problem is an increase in both the fiscal and current account deficits simultaneously. But before we explain what it could mean for the economy, let us briefly look at these two deficits.

In simple terms, fiscal deficit is a scenario where the government spends more money than its revenue. The government fills this void by borrowing -- mainly from the markets.

A current account deficit is a shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations.

What happens when the twin deficit problem strikes? And why we may be staring at it?

The Ukraine war has led to supply shortages, leading to higher commodity prices and an increased subsidy burden on the government. Adding to that, the duty cuts on petrol and diesel mean the government may have to forgo Rs 85,000 crore in revenue for the current fiscal. As the war lingers, there is every chance the government may miss the fiscal deficit target for FY23, which is 6.9 per cent of GDP.

The increase in the fiscal deficit may cause the current account deficit to widen. The twin deficit problem, especially the worsening current account deficit, may compound the effect of costlier imports and weaken the value of the rupee, thereby further aggravating external imbalances. This creates the risk -- even though admittedly low at this point- of a cycle of wider deficits and a weaker currency.

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First Published: Jun 23 2022 | 7:00 AM IST

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